Page 396 - Hydrocarbon Exploration and Production Second Edition

Risk Analysis 383

field production profile. If no such field data are available, then the scenarios would
be considered as viable alternative forecasts.
The advantages of this approach is that any one case can be fully described in
terms of the specific assumptions, making it more tangible than the stochastic
approach. It is also strongly driven by a limited number of realistic scenarios. The
individual cases can be weighted if required and displayed on a cumulative proba-
bility curve (Figure 15.19), showing the range of uncertainty, and allowing, say, a
p90 case to be selected, if required.

15.4. Managing Commercial Risk

This subject is of course very broad, and only a few key issues will be addressed
in this section. One of the main commercial risks faced in a project investment is
that of the price of the product. The following diagram shows a history of oil prices
in real terms and money of the day for the past century (Figure 15.20).
These large fluctuations in price are a result of both the perception of the market
makers and varying supply and demand, which is influenced by factors such as rapid
industrialization, war, natural disasters and other perceived threats.
It is basic practice is to test the project economics using a low case price forecast
to check that the project is still economic at the company’s forecast of the lowest
long-term price – clearly a rather individual choice given the fluctuations shown
above. Hedging mechanisms exist for taking the impact of price variation out of the
project risks. In a hedging arrangement the seller agrees with a buyer to sell oil in
the future at a price agreed at the date of striking the hedge agreement. This deal
can be brokered, with the broker taking a commission on the deal. Of course in the
future the company may gain or lose compared with the prevailing price at the date
of sale, but at least the price uncertainty has been eliminated.
In gas projects, it is common to sell the gas forward at an agreed price, and
this is often necessary to reduce exposure to price when investing in a large capital
project with a relatively small margin, such as an LNG plant, as discussed in
Section 9.3, Chapter 9.
A natural risk reduction can be achieved by a company diversifying its investments
into a portfolio of projects, rather than placing all of its faith in one project. Large
International Oil Companies (IOCs) and NOCs do this as a matter of course.